Chapter 01 - Financial Statements and Business Decisions
Chapter 01
Financial Statements and Business Decisions
True / False Questions
1. Accounting is a system that collects and processes financial information about an
organization and reports that information to decision makers.
TRUE
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
2. External users of accounting information include the managers who plan, organize, and run
a business.
FALSE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
3. In accounting and reporting for a business entity, the accounting and reporting for the
business must be kept separate from other economic affairs of its owners.
TRUE
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
1-1
Chapter 01 - Financial Statements and Business Decisions
4. Accounting communicates financial information about a business to both internal and
external users.
TRUE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
5. A statement of financial position should be dated for a period (such as "For the year ended
December 31, 20X1"), whereas a statement of earnings should be dated at a point in time
(such as "At December 31, 20X1").
FALSE
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Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
6. Expenses are the cost of assets consumed or services used in the process of generating
revenue.
TRUE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-2
Chapter 01 - Financial Statements and Business Decisions
7. Generally speaking, a financially success business will have positive cash flows from
operating activities.
TRUE
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Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
8. The issuance of additional common shares is a financing activity that generates positive
cash flow to the firm.
TRUE
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Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
9. Borrowing money and issuing shares are examples of financing activities
TRUE
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Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-3
Chapter 01 - Financial Statements and Business Decisions
10. Total assets are $60,000, total liabilities, $30,000, and share capital is $20,000; therefore,
retained earnings is $5,000.
FALSE
Calculation: $60,000 - $30,000 - $20,000 = $10,000.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
11. Investing activities involve collecting the necessary funds to operate the business.
FALSE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
12. The purchase of equipment is an example of a financing activity.
FALSE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-4
Chapter 01 - Financial Statements and Business Decisions
13. The reasons for a decrease in cash can be determined by examining the statement of
earnings.
FALSE
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Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
14. Economic resources that are owned by a business are called shareholders' equity.
FALSE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
15. The accounting model for the statement of financial position is: Assets + Liabilities Shareholders' Equity.
FALSE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
16. Assets are resources owned by a business that provide current services or benefits to the
business.
FALSE
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Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-5
Chapter 01 - Financial Statements and Business Decisions
17. Profit is the excess of total revenues over total expenses incurred to generate revenue
during a specific period.
TRUE
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
18. The financial statements prepared by a corporation include a statement of financial
position, statement of earnings, statement of cash flows, and statement of money.
FALSE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-17 Summary of the Four Basic Financial Statements
19. A banker who is considering making a loan to a corporation would be one of the
corporation's internal decision makers.
FALSE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-6
Chapter 01 - Financial Statements and Business Decisions
20. Assets are economic resources controlled by the entity as a result of past transactions or
events and from which future economic benefits can be obtained.
TRUE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-04 Elements
21. The financial statement that shows an entity's economic resources and its liabilities is the
statement of retained earnings.
FALSE
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Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
22. The statement of comprehensive income reports the change in shareholders' equity during
a period from business activities other than investments by shareholders or distributions to
shareholders.
TRUE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-7
Chapter 01 - Financial Statements and Business Decisions
23. A note payable is a borrowing instrument that generally does not involve the payment of
interest.
FALSE
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Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
24. If a corporation does not pay its obligations when they are due, its creditors may be able to
force the sale of the business's assets to pay their claims.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
25. The fiscal year end of a given business must be December 31, the calendar year end.
FALSE
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
26. A net loss in a given accounting period will shrink the retained earnings account.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-8
Chapter 01 - Financial Statements and Business Decisions
27. A plane ticket sold by Air Canada in the fall for going home during Christmas
immediately gets recorded as revenue.
FALSE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
28. When a company ships products to a customer and bills the customer, the company should
recognize revenue as earned.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
29. The amount of cash paid by a business for office rent would be reported on the statement
of cash flows as a financing activity.
FALSE
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Blooms: Understand
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-9
Chapter 01 - Financial Statements and Business Decisions
30. Repayment of a bank loan is classified on the statement of cash flows as an operating
activity.
FALSE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
31. Liabilities are the entity's legal obligations that result from past business events.
TRUE
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
32. International Financial Accounting Standards are produced by the International
Accounting Standards Board (IASB), which is an independent standard-setting board
consisting of 15 members from twelve countries.
TRUE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-19 International Financial Reporting Standards (IFRS)
33. Financial accounting is based on man-made rules that sometimes undergo change.
TRUE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-19 International Financial Reporting Standards (IFRS)
1-10
Chapter 01 - Financial Statements and Business Decisions
34. Auditors are responsible for expressing an opinion of the consolidated financial statements
based on their audits.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
35. Primary responsibility for the information in the financial statements lies with auditors.
FALSE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
36. The AcSB is currently the body responsible for establishing accounting standards.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
37. The Accounting Standards Board (AcSB) is an agency of the federal government that
establishes generally accepted accounting principles for businesses.
FALSE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
1-11
Chapter 01 - Financial Statements and Business Decisions
38. Generally accepted accounting principles are essentially identical in most developed
countries.
FALSE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-19 International Financial Reporting Standards (IFRS)
39. One of the disadvantages of a corporation when compared to a partnership is the limited
liability of the owners.
FALSE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-S1 Describe the different types of business entities.
Topic: 01-27 Appendix 1A: Types of Business Entities
40. Corporations have the advantage of having limited liability.
TRUE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-S1 Describe the different types of business entities.
Topic: 01-27 Appendix 1A: Types of Business Entities
41. In a partnership, the creditor can come after the personal assets of either partner should the
business default on its debt.
TRUE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-S1 Describe the different types of business entities.
Topic: 01-27 Appendix 1A: Types of Business Entities
1-12
Chapter 01 - Financial Statements and Business Decisions
42. In a sole proprietorship the owner is often an employee of the business.
TRUE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-S1 Describe the different types of business entities.
Topic: 01-27 Appendix 1A: Types of Business Entities
43. A partnership is an incorporated entity that has more than one owner.
FALSE
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-S1 Describe the different types of business entities.
Topic: 01-27 Appendix 1A: Types of Business Entities
44. Independent CPAs in the public practice of accounting are viewed as employees of their
clients.
FALSE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-29 Practice of Public Accounting
45. An audit involves the examination of the financial reports (prepared by the management
of the company) to ensure that they represent what they claim and conform with IFRS.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-29 Practice of Public Accounting
1-13
Chapter 01 - Financial Statements and Business Decisions
46. Many opportunities exist for managers to intentionally prepare misleading financial
reports.
TRUE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-29 Practice of Public Accounting
47. Failure to comply with professional rules of conduct can result in serious penalties for
professional accountants, but not the rescinding of the professional designation of an
offending member.
FALSE
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-29 Practice of Public Accounting
48. High ethical standards are required for preparers of financial information.
TRUE
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-29 Practice of Public Accounting
1-14
Chapter 01 - Financial Statements and Business Decisions
Multiple Choice Questions
49. What is the primary purpose of the statement of financial position?
A. To measure the profit of a business up to a particular point in time.
B. To report the difference between cash inflows and cash outflows for the period.
C. To report the financial position of the reporting entity at a particular point in time.
D. To report assets at their current market value at a particular point in time.
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
50. On January 1, 20X1, two individuals invested $150,000 each to form Hornbeck
Corporation. Hornbeck had total revenues of $15,000 during 20X1 and $40,000 during 20X2.
Total expenses for the same periods were $8,000 and $22,000, respectively. Cash dividends
paid out to shareholders totaled $6,000 in 20X1 and $12,000 in 20X2. What was the ending
balance in Hornbeck's retained earnings account at the end of 20X1 and 20X2?
A. $1,000 and $6,000 respectively.
B. $1,000 and $7,000, respectively.
C. $7,000 and $19,000 respectively.
D. $301,000 and $306,000 respectively.
Calculation: $15,000 - $8,000 - $6,000 = $1,000; $1,000 + $40,000 - $22,000 - $12,000 =
$7,000.
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Blooms: Apply
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-15
Chapter 01 - Financial Statements and Business Decisions
51. The HAT Corporation had revenues of $210,000, expenses of $85,000, and an income tax
rate of 20 percent in 20X2. What would profit after taxes be?
A. $5,000.
B. $15,000.
C. $20,000.
D. $100,000.
Calculation: ($210,000 - $85,000)  80% = $100,000.
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Blooms: Apply
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
52. Brown Corporation reported the following amounts at the end of the first year of
operations, December 31, 20X1: Share capital $20,000; Sales revenue $95,000; Total assets
$85,000, No dividends, and Total liabilities $35,000. What would shareholders' equity and
total expenses be?
A. Shareholders' equity, $50,000 and expenses $65,000.
B. Shareholders' equity, $60,000 and expenses $75,000.
C. Shareholders' equity, $80,000 and expenses $40,000.
D. Shareholders' equity, $80,000 and expenses $85,000.
Calculation: $85,000 - $35,000 = $50,000; $20,000 + $95,000 - $50,000 = $65,000.
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Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-16
Chapter 01 - Financial Statements and Business Decisions
53. All of the following are internal users of accounting data except:
A. The president of a company.
B. The controller of a company.
C. Labour union for the company's employees
D. A salesperson of a company.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-17 Summary of the Four Basic Financial Statements
54. If total liabilities increased by $25,000 and shareholders' equity increased by $5,000
during a period, then total assets must change by what amount and direction during that same
period?
A. $20,000 decrease.
B. $20,000 increase.
C. $25,000 increase.
D. $30,000 increase.
Calculation: $25,000 + $5,000 = $30,000.
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Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-15 Relationships among the Four Financial Statements
1-17
Chapter 01 - Financial Statements and Business Decisions
55. Which of the following activities involves raising the necessary funds to support the
business?
A. Operating.
B. Investing.
C. Financing.
D. Marketing.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
56. Buying assets needed to operate a business is an example of a(n)
A. purchasing activity.
B. financing activity.
C. investing activity.
D. operating activity.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
57. The common characteristic possessed by all assets is
A. long life.
B. depreciation
C. tangible nature.
D. future economic benefit.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-18
Chapter 01 - Financial Statements and Business Decisions
58. Expenses are incurred
A. only on rare occasions.
B. to produce assets.
C. to produce liabilities.
D. to generate revenues.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
59. The financial statement that summarizes the changes in contributed capital and retained
earnings for a specific period of time is the
A. statement of financial position.
B. statement of earnings.
C. statement of cash flows.
D. statement of changes in equity.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
60. Retained earnings at the end of the period is equal to
A. retained earnings at the beginning of the period plus net earnings minus liabilities.
B. retained earnings at the beginning of the period plus net earnings minus dividends.
C. net earnings for the period
D. assets plus liabilities.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-19
Chapter 01 - Financial Statements and Business Decisions
61. What form does financial accounting information provided by an entity to decision
makers generally take?
A. Financial statements.
B. Various forecasts and performance reports.
C. An analysis of changes in the price of a corporation's shares.
D. Comparisons between the company and its competitors.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
62. If the retained earnings account increases from the beginning of the year to the end of the
year, then
A. profit is greater than dividends.
B. a loss is less than dividends.
C. additional investments are less than reported losses.
D. dividends were paid.
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Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
63. Shareholders' equity can be described as claims of
A. creditors on total assets.
B. owners on total assets.
C. customers on total assets.
D. debtors on total assets.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-20
Chapter 01 - Financial Statements and Business Decisions
64. Which financial statement would reveal whether the company relies more on debt or
shareholders' equity to finance its assets?
A. Statement of cash flows.
B. Statement of changes in equity.
C. Statement of earnings.
D. Statement of financial position.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
65. The statement of financial position and statement of changes in equity are related because
A. the total assets on the statement of financial position is reported on the statement of
changes in equity.
B. the ending amount on the statement of changes in equity is reported on the statement of
financial position.
C. the ending amount on the statement of changes in equity is transferred to the statement of
cash flows.
D. both contain information for the corporation.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-15 Relationships among the Four Financial Statements
1-21
Chapter 01 - Financial Statements and Business Decisions
66. Carrington Company owes you $500 on account due within 15 days. Which of the
following amounts on its statement of financial position would help you to determine the
likelihood that you will be paid in full and on time?
A. Cash and trade receivables.
B. Cash and property and equipment.
C. Cash and inventory.
D. Contributed capital and retained earnings.
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Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
67. The statement of cash flows and the statement of financial position are interrelated
because
A. the ending amount of cash on the statement of cash flows must agree with the amount on
the statement of earnings.
B. the ending amount of cash on the statement of cash flows must agree with the amount in
the statement of changes in equity.
C. the ending amount of cash on the statement of cash flows must agree with the amount in
the statement of financial position.
D. both disclose the corporation's profit.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-15 Relationships among the Four Financial Statements
1-22
Chapter 01 - Financial Statements and Business Decisions
68. Which of the following are the two primary components of shareholders' equity?
A. Non-current assets and liabilities
B. Contributed capital and Retained earnings.
C. Short term debt and retained earnings
D. Long-term debt and retained earnings.
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
69. The statement of changes in equity is dependent on the results from
A. the statement of cash flows.
B. the statement of financial position.
C. the statement of earnings.
D. a company's share capital.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-15 Relationships among the Four Financial Statements
70. The primary purpose of the statement of cash flows is to report
A. a company's investing transactions.
B. a company's financing transactions.
C. information about cash receipts and cash payments of a company.
D. the net increase or decrease in cash.
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Blooms: Understand
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-23
Chapter 01 - Financial Statements and Business Decisions
71. Speedy Car Repair Shop Ltd. started the year with total assets of $70,000 and total
liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues,
$65,000 in expenses, and dividends of $5,000. Shareholders' equity at the end of the year was
A. $60,000.
B. $65,000.
C. $70,000.
D. $75,000.
Calculation: Beginning shareholders equity is 70000 - 40000 = 30000. Profit for the year was
100000 - 65000 = 35000. Ending SE is 30000 + 35000 - 5000 = 60000.
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Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
72. A service business' income statement is likely to have which one of the following as the
largest figure?
A. salaries expense
B. equipment maintenance
C. cost of goods sold
D. income taxes
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-24
Chapter 01 - Financial Statements and Business Decisions
73. The most significant expense for a merchandising company is
A. salaries expense
B. equipment maintenance
C. cost of goods sold
D. income taxes
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
74. On the statement of financial position, assets may be presented
A. in order of liquidity
B. in order of reverse liquidity
C. either in order of liquidity or in order of reverse liquidity
D. in alphabetical order
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
75. Retained earnings are
A. the shareholders' claim on total assets.
B. equal to cash.
C. equal to revenues.
D. the amount of profit kept in the corporation for future use.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-25
Chapter 01 - Financial Statements and Business Decisions
76. What are business liabilities?
A. Amounts it expects to collect in the future from customers.
B. Debts or obligations resulting from past business events.
C. The amounts that owners have invested in the business.
D. The increases in assets that result from profitable operations.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
77. Why would EZ Bank, in deciding whether to make a loan to Davis Company, be
interested in the amount of liabilities Davis has on its statement of financial position?
A. The liabilities represent resources that could be used to repay the loan.
B. If Davis already has many other obligations, it might not be able to repay the loan.
C. Existing liabilities give an indication of how profitable Davis has been in the past.
D. EZ bank would be interested in the amount of Davis's assets but not the amount of
liabilities.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
78. What are the two categories of shareholders' equity usually found on the statement of
financial position of a corporation?
A. Share capital and long-term liabilities.
B. Share capital and property, plant, and equipment.
C. Retained earnings and notes payable.
D. Contributed capital and retained earnings.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-26
Chapter 01 - Financial Statements and Business Decisions
79. Jameson & Johnson Inc., recorded $250,000 of depreciation expense in December 20X6.
The most likely effect on the company's accounting equation is
A. no effect on assets.
B. a decrease in assets of $250,000.
C. an increase in liabilities of $250,000.
D. an increase in assets of $250,000.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
80. Allentown Corporation has on its statement of financial position the following amounts:
Total assets of $3,500,000
Total liabilities of $500,000
Contributed capital of $1,000,000.
What is the amount of retained earnings that should appear on Allentown's statement of
financial position?
A. $2,000,000.
B. $3,000,000.
C. $4,000,000.
D. $5,000,000.
Calculation: $3,500,000 - $500,000 - $1,000,000 = $2,000,000.
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Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-27
Chapter 01 - Financial Statements and Business Decisions
81. Which financial statement for a business would you look at to determine the company's
performance during an accounting period?
A. Statement of financial position.
B. Statement of cash flows.
C. Statement of earnings.
D. Statement of changes in equity.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
82. Which of the following is not a principal type of business activity?
A. Operating
B. Investing
C. Financing
D. Delivering
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
83. How do most businesses earn revenues?
A. When they collect trade receivables.
B. Through sales of goods or services to customers.
C. By borrowing money from a bank.
D. By selling shares to shareholders.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-28
Chapter 01 - Financial Statements and Business Decisions
84. A group of individuals formed a new company with an investment of $100,000. The most
likely effect of this transaction on the company's accounting equation at the time of the
formation is an increase in cash and
A. an increase in revenue.
B. an increase in liabilities.
C. an increase in owners' capital.
D. an increase in assets.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
85. During 20X2, its second year in operation, Banner Company delivered goods to customers
for which customers paid or promised to pay $5,850,000. The amount of cash collected from
customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was
$1,200,000. What is the amount of sales revenue that Banner should report on its statement of
earnings for 20X2?
A. $4,650,000.
B. $4,760,000.
C. $5,850,000.
D. $5,960,000.
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Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-29
Chapter 01 - Financial Statements and Business Decisions
86. During 20X2, its second year in operation, Banner Company delivered goods to customers
for which customers paid or promised to pay $5,850,000. Assume all sales were on account
and the amount of cash collected from customers was $5,960,000. The amount of trade
receivables at the beginning of 20X2 was $1,200,000. Based on this information, what is the
amount of trade receivables that Banner would report at the end of 20X2?
A. $110,000.
B. $1,090,000.
C. $1,310,000.
D. $5,850,000.
Calculation: $1,200,000 + $5,850,000 - $5,960,000 = $1,090,000.
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Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
87. What is the amount of revenue recognized in the statement of earnings by a company that
sells goods to customers?
A. The cash collected from customers during the current period.
B. Total sales, both cash and credit sales, for the period.
C. Total sales minus beginning amount of trade receivables.
D. The amount of cash collected plus the beginning amount of trade receivables.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-30
Chapter 01 - Financial Statements and Business Decisions
88. The statement of cash flows and the statement of financial position are interrelated
because
A. the ending amount of cash on the statement of cash flows must agree with the amount in
the statement of changes in equity.
B. the ending amount of cash on the statement of cash flows must agree with the amount in
the statement of financial position.
C. both disclose the corporation's profit.
D. the ending amount of cash on the statement of cash flows must agree with the amount on
the statement of earnings.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-15 Relationships among the Four Financial Statements
89. On January 1, 20X1, Taylor Corporation had retained earnings of $6,500,000. During
20X1, Taylor had profit of $1,050,000 and dividends of $450,000. What is the amount of
Taylor's retained earnings at the end of 20X1?
A. $6,050,000.
B. $6,950,000.
C. $7,100,000.
D. $7,550,000.
Calculation: $6,500,000 + $1,050,000 - $450,000 = $7,100,000.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-31
Chapter 01 - Financial Statements and Business Decisions
90. What are the categories of cash flows that appear on a statement of cash flows?
A. Cash flows from investing, financing, and service activities.
B. Cash flows from operating, production, and internal activities.
C. Cash flows from financing, production, and growth activities.
D. Cash flows from operating, investing, and financing activities.
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Blooms: Remember
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
91. Borrowing money is an example of a(n)
A. marketing activity
B. financing activity.
C. investing activity.
D. operating activity.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
92. On the statement of cash flows, how would a company report the purchase of machinery?
A. As cash used in operating activities.
B. As cash used in financing activities.
C. As cash used in purchasing activities.
D. As cash used in investing activities.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-32
Chapter 01 - Financial Statements and Business Decisions
93. When would a company report a net loss?
A. When retained earnings decreased due to paying dividends to shareholders.
B. When its assets decreased during an accounting period.
C. When its liabilities increased during an accounting period.
D. When its expenses exceeded its revenues for an accounting period.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
94. Which of the following is the amount of rent expense reported on the statement of
earnings?
A. The amount of cash paid for rent in the current period.
B. The amount of cash paid for rent in the current period less any unpaid rent at the end of the
period.
C. The amount of rent used up in the current period to earn revenue.
D. The amount of cash paid for rent for the future period.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-08 Elements
95. What events cause changes in a corporation's retained earnings?
A. Profit or loss and declaration of dividends.
B. Declaration of dividends and issuance of shares to new shareholders.
C. Profit issuance of shares, and borrowing from a bank.
D. Declaration of dividends and purchase of new machinery.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-33
Chapter 01 - Financial Statements and Business Decisions
96. The statement of financial position
A. reports the changes in assets, liabilities, and shareholders' equity over a period of time.
B. reports the assets, liabilities, and shareholders' equity at a specific date.
C. presents the revenues and expenses for a specific period of time.
D. summarizes the changes in retained earnings for a specific period of time.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
97. If you wanted to know how much of its profit a corporation distributed as dividends,
which financial statement would you look at?
A. Statement of financial position.
B. Statement of earnings.
C. Statement of cash flows.
D. Statement of changes in equity.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
98. Why is the operating activities section often believed to be the most important part of a
statement of cash flows?
A. It gives the most information about how operations have been financed.
B. It shows the dividends that have been paid to shareholders.
C. It indicates a company's ability to generate cash from sales to meet current cash needs.
D. It shows the net increase or decrease in cash during the period.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-14 Elements
1-34
Chapter 01 - Financial Statements and Business Decisions
99. If you wanted to know what accounting rules a company follows related to its inventory,
where would you look?
A. The statement of financial position.
B. The statement of earnings.
C. The notes to the financial statements.
D. The headings to the financial statements.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-16 Notes to Financial Statements
100. During 20X1, Burton Company delivered products to customers for which customers
promised to pay $3,820,000. The company collected $3,670,000 in cash from customers
during the year. Indicate which of these amounts will appear on the statement of earnings and
which on the statement of cash flows.
A. $3,670,000 appears on both the statement of earnings and the statement of cash flows.
B. $3,670,000 appears on the statement of cash flows, and $3,820,000 appears on the
statement of earnings.
C. $3,820,000 appears on both the statement of earnings and the statement of cash flows.
D. $3,820,000 appears on the statement of cash flows, and $3,670,000 appears on the
statement of earnings.
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Blooms: Apply
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-15 Relationships among the Four Financial Statements
1-35
Chapter 01 - Financial Statements and Business Decisions
101. At the beginning of 20X2, Rodriguez Corporation had assets of $820,000 and liabilities
of $340,000. During the year, assets increased by $40,000 and liabilities decreased by $8,000.
What was total shareholders' equity at the end of 20X2?
A. $432,000.
B. $480,000.
C. $528,000.
D. $1,208,000.
Calculation: ($820,000 + $40,000) - ($340,000 - $8,000) = $528,000.
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Blooms: Apply
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
102. What term is used for probable future economic benefits owned by an entity, and
obtained as the result of past transactions?
A. Assets.
B. Liabilities.
C. Revenues.
D. Retained earnings.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-36
Chapter 01 - Financial Statements and Business Decisions
103. Prepaid rent is
A. an asset on the statement of financial position
B. a liability on the statement of financial position
C. part of shareholder's equity on the statement of financial position
D. not on the statement of financial position.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-04 Elements
104. What results from the purchase of goods or services on credit and from borrowing?
A. Assets.
B. Liabilities.
C. Share capital.
D. Revenues.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-04 Elements
105. How are the differing claims of creditors and investors recognized by a corporation?
A. The claims of creditors are liabilities; those of investors are assets.
B. The claims of both creditors and investors are liabilities, but only the claims of investors
are long term.
C. The claims of creditors are liabilities; the claims of investors are recorded as shareholders'
equity.
D. The claims of creditors and investors are essentially equivalent.
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-04 Elements
1-37
Chapter 01 - Financial Statements and Business Decisions
106. The statement of financial position is also known as
A. The balance sheet
B. The trial balance
C. The unbalance sheet
D. The statement of operations
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Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
107. In what order are assets are listed on a statement of financial position?
A. Dollar amount (largest first).
B. Date of acquisition (earliest first).
C. Ease of conversion to cash.
D. Importance to the operation of the business.
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-03 Structure
108. In what order, would the assets of Any Company be listed on their statement of financial
position?
A. Cash, Trade Receivables, Inventory, Plant and Equipment.
B. Cash, Inventory, Trade Receivables, Plant and Equipment.
C. Cash, Trade Receivables, Marketable Securities, Inventory.
D. Cash, Trade Receivables, Plant and Equipment, Inventory.
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Blooms: Remember
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-03 Structure
1-38
Chapter 01 - Financial Statements and Business Decisions
109. The ending retained earnings balance of the Brown Hat restaurant chain increased by
$4.3 billion from the beginning of the year. The company had declared a dividend of $1.5
billion. What was the profit earned during the year?
A. $2.8 billion.
B. $3.0 billion.
C. $5.8 billion.
D. There is no way to determine net income as not enough information was given.
Calculation: $4.3 billion + $1.5 billion = $5.8 billion.
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Blooms: Apply
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
110. What section of the statement of cash flows do bankers consider to be the most
important?
A. Investing.
B. Operating.
C. Financing.
D. All the sections are equally important.
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Blooms: Understand
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-14 Elements
1-39
Chapter 01 - Financial Statements and Business Decisions
111. Which of the following statements is TRUE?
A. Publicly traded enterprises must use IFRS for external reporting purposes.
B. The Accounting Standards Board is a government body.
C. The SEC is the most influential Canadian regulator of the flow of financial information
provided by publicly traded companies in Canada.
D. Publicly traded enterprises must use the accounting standards prescribed for private
enterprises for external reporting.
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Blooms: Remember
Difficulty: Hard
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-19 International Financial Reporting Standards (IFRS)
112. Which of the following activities would cause investors to overpay for the acquisition of
a company from its current owners?
A. Understated trade payables and overstated inventory.
B. Understated revenues and overstated expenses.
C. Understated assets and overstated expenses.
D. Understated assets and overstated revenues.
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Blooms: Understand
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-18 Responsibilities for the Accounting Communication Process
1-40
Chapter 01 - Financial Statements and Business Decisions
113. Which of the following statements is true about the price earnings (P/E) ratio?
A. It is a ratio of importance to creditors.
B. A high P/E ratio indicates investors have little confidence in the future profit potential of
the company.
C. The P/E ratio could be used to approximate the value investors would be willing to pay for
the company's acquisition from existing owners.
D. The P/E ratio increases as profit increases.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-18 Responsibilities for the Accounting Communication Process
114. Which government regulatory agency has the legal authority to prescribe financial
reporting requirements for corporations that sell their securities in Canadian stock exchanges
in the province of Ontario?
A. AcSB.
B. CRA.
C. OSC.
D. CICA.
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Difficulty: Easy
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
1-41
Chapter 01 - Financial Statements and Business Decisions
115. Which securities regulator in the province of Ontario has broad powers to determine
measurement rules for financial statements of publicly traded companies on the Toronto Stock
Exchange?
A. The Canada Revenue Agency.
B. The Ontario Securities Commission.
C. The Federal Accounting Office.
D. The Supreme Court.
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Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
116. Financial statements are prepared for the user. Which of the following best describes the
responsibility for the preparation of financial statements?
A. It is the responsibility of external auditors.
B. It is the responsibility of shareholders.
C. It is the responsibility of management.
D. It is the responsibility of standard setters.
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Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
117. With whom does primary responsibility for the information in a corporation's financial
statements rest?
A. The shareholders of the corporation.
B. The managers of the corporation.
C. The Ontario Securities Commission.
D. The public accountant who audited the financial statements.
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Difficulty: Easy
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
1-42
Chapter 01 - Financial Statements and Business Decisions
118. What is an examination of the financial statements of a business to ensure that they
conform with international financial reporting standards called?
A. A certification.
B. An audit.
C. A verification.
D. A validation.
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Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-22 Ensuring the Accuracy of Financial Statements
119. What is the purpose of an audit?
A. To prove the accuracy of an entity's financial statements.
B. To lend credibility to an entity's financial statements.
C. To endorse the quality of leadership that managers provide for a corporation.
D. To establish that a corporation's shares are a sound investment.
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Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-22 Ensuring the Accuracy of Financial Statements
120. Why do the managers of a corporation hire independent auditors?
A. To guarantee annual and quarterly financial statements.
B. To handle some personnel issues and problems.
C. To audit and report on the fairness of financial statement presentation.
D. To lobby the AcSB for changes in generally accepted accounting principles.
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Difficulty: Easy
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-22 Ensuring the Accuracy of Financial Statements
1-43
Chapter 01 - Financial Statements and Business Decisions
121. Why is the auditor's role in performing audits, important to our society?
A. Auditors provide direct financial advice to potential investors.
B. Auditors have the primary responsibility for the information contained in financial
statements.
C. Auditors issue reports on the accuracy of each financial transaction.
D. An audit of financial statements helps investors and others to know that they can rely on
the information presented in the financial statements.
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Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-29 Practice of Public Accounting
122. What is one of the disadvantages of a corporation, when compared to a partnership?
A. The shareholders have limited liability.
B. The shareholders are treated as a separate legal entity from the corporation.
C. The corporation and its shareholders are potentially subject to double taxation.
D. The corporation provides continuity of life.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-27 Appendix 1A: Types of Business Entities
123. Which of the following statements is true about a sole proprietorship?
A. The owner and the business are separate legal entities but not separate accounting entities.
B. The owner and the business are separate accounting entities but not separate legal entities.
C. The owner and the business are separate legal entities and separate accounting entities.
D. Most large businesses in this country are organized as sole proprietorships.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-27 Appendix 1A: Types of Business Entities
1-44
Chapter 01 - Financial Statements and Business Decisions
124. For a business organized as a general partnership, which statement is true?
A. The owners and the business are separate legal entities.
B. Each partner is potentially responsible for the debts of the business.
C. Formation of a partnership requires getting a charter from the province of incorporation.
D. A partnership is not considered to be a separate accounting entity.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-27 Appendix 1A: Types of Business Entities
125. For what reason might a group of people establishing a business prefer to set it up as a
corporation rather than a partnership?
A. To have limited liability.
B. To avoid double taxation.
C. Because of ease of formation.
D. To avoid complex reporting procedure for government agencies
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-27 Appendix 1A: Types of Business Entities
1-45
Chapter 01 - Financial Statements and Business Decisions
Short Answer Questions
126. Indicate whether each of the following parties is an "internal" or "external" user of
financial statements.
a) Creditor
b) Company Human Resources
c) Shareholders
d) Mutual fund manager
e) Canada Revenue Agency
f) Labour union
a) E
b) I
c) E
d) E
e) E
f) E
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-01 The Four Basic Financial Statements: An Overview
1-46
Chapter 01 - Financial Statements and Business Decisions
127. Identify which of the following accounts appear on a statement of financial position.
(a) Service revenue
(b) Cash
(c) Common shares
(d) Accounts payable
(e) Rent expense
(f) Supplies
(g) Land
(h) Dividends
(i) Prepaid insurance
(b), (c), (d), (f), (g), (i)
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-47
Chapter 01 - Financial Statements and Business Decisions
128. For the items listed below, fill in the appropriate code letter to indicate whether the item
is an asset, liability, or shareholders' equity item.
Asset
Liability
Shareholders’ Equity
Code
A
L
SE
_____ 1. Rent expense
_____ 2. Office equipment
_____ 3. Trade payables
_____ 4. Common shares
_____ 5. Insurance expense
_____ 6. Cash
_____ 7. Trade receivables
_____ 8. Retained earnings
_____ 9. Service revenue
_____ 10. Bank loan payable
_____ 11. Dividends
_____ 12. Unearned revenue
Please review the following information:
1. SE
2. A
3. L
4. SE
5. SE
6. A
7. A
8. SE
9. SE
10. L
11. SE
12. L
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-04 Elements
1-48
Chapter 01 - Financial Statements and Business Decisions
129. Classify each of these items as an asset (A), liability (L), or shareholders' equity (SE).
_____ 1. Rent receivable
_____ 2. Salaries expense
_____ 3. Preferred shares
_____ 4. Office supplies
_____ 5. Retained earnings
_____ 6. Income tax payable
_____ 7. Mortgage payable
_____ 8. Land
_____ 9. Dividends
_____ 10. Office supplies expense
Please review the following information:
1. A
2. SE
3. SE
4. A
5. SE
6. L
7. L
8. A
9. SE
10. SE
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-04 Elements
1-49
Chapter 01 - Financial Statements and Business Decisions
130. Match each definition with its related term or abbreviation by entering the appropriate
letter in the space provided.
_____ 1. OSC
_____ 2. CICA
_____ 3. AcSB
_____ 4. CPA
_____ 5. IFRS
Term or Abbreviation Definition
A. A system that collects and processes financial information about an organization and
reports that information to decision makers.
B. Measurement of information about an entity in the monetary unit-dollars or other national
currency.
C. An unincorporated business owned by two or more persons.
D. The organization for which financial data are to be collected (separate and distinct from its
owners).
E. An incorporated entity that issues shares as evidence of ownership.
F. Initial recording of financial statement elements at acquisition cost.
G. An examination of the financial reports to assure that they represent what they claim and
conform with international financial reporting standards.
H. Chartered Professional Accountant.
I. An unincorporated business owned by one person.
J. A report that describes the auditors' opinion of the fairness of the financial statement
presentations and the evidence gathered to support that opinion.
K. Ontario Securities Commission.
L. Accounting Standards Board.
M. Company that can be bought and sold by investors on established stock exchanges.
N. International financial reporting standards
O. Canadian Institute of Chartered Accountants.
1. K; 2. O; 3. L; 4. H; 5. N
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Difficulty: Medium
Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial
statements and how companies ensure the accuracy of their financial statements.
Topic: 01-18 Responsibilities for the Accounting Communication Process
Topic: 01-19 International Financial Reporting Standards (IFRS)
1-50
Chapter 01 - Financial Statements and Business Decisions
131. Using the income statement model and the statement of financial position model, fill-in
the missing amounts for each independent case below. Assume the amounts given are at the
end of the first full year of operations of the company.
Case
A
B
C
D
E
Total
Revenue
$500,000
75,000
$
250,000
$
Total
Assets
$300,000
$
145,000
375,000
$
Total
Expenses
$425,000
$
70,000
200,000
64,000
Total
Profit (Loss) Shareholders'
Liabilities
Equity
$110,000
$
$
70,000
15,000
55,000
$
(10,000)
90,000
60,000
$
$
88,000
3,000
65,000
Please review the following information:
Case
A
B
C
D
E
Total
Revenue
Total Assets
$125,000
Total
Expenses
Profit (Loss)
$75,000
Shareholder
s' Equity
$190,000
$50,000
$315,000
$60,000
$60,000
$67,000
Total
Liabilities
$55,000
$153,000
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
Topic: 01-06 The Statement of Earnings
1-51
Chapter 01 - Financial Statements and Business Decisions
132. Plants Supreme, Inc., a small retail store which sells house plants, started business on
January 1, 20X1. At the end of January, 20X1, the following information was available:
Sales of plants for cash
Sales of plants for credit
Cost of plants which were sold and paid for during January
$50,000
3,000
30,000
Cash expenditures during January:
Salaries
Telephone
Office Supplies (all used)
Electricity
Rent on the store for January, 20X1
(will not be paid until February, 20X1)
$4,500
100
100
200
800
A. Using the above information, prepare the income statement for Plants Supreme for the
month ended January 31, 20X1.
B. What is the amount of cash flows provided by operating activities to be presented on the
statement of cash flows?
Plants Supreme, Inc.
Income Statement
For the Month Ended January 31, 20X1
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Chapter 01 - Financial Statements and Business Decisions
Revenue ($50,000 + $3,000)
Expenses:
Cost of goods sold
Salaries
Telephone
Office supplies used
Electricity
Rent
Profit
$53,000
$30,000
4,500
100
100
200
800
35,700
$17,300
B. $17,300 - $3,000 + $800 = $15,100 OR $50,000 - $30,000 - $4,500- $100 - $100 - $200 =
$15,100
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Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
Topic: 01-12 The Statement of Cash Flows
1-53
Chapter 01 - Financial Statements and Business Decisions
133. Calculate the missing amount in each category of the accounting equation.
(a)
(b)
(c)
Assets
$360,000
$178,000
$?
Liabilities
$?
$73,000
$302,000
Shareholders' Equity
$98,000
$?
$310,000
(a) $262,000 ($360,000 - $98,000 = $262,000).
(b) $105,000 ($178,000 - $73,000 = $105,000).
(c) $612,000 ($302,000 + $310,000 = $612,000).
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
134. Indicate which of the following statements are accurate:
A. The statement of financial position is prepared after the income statement is prepared.
B. A company's cash balance at the end of an accounting period is found only on the
statement of financial position.
C. The issuance of shares would affect all four of the financial statements.
D. The payment of dividends reduces income for the period.
E. Unearned revenue is an account found on the statement of financial position.
A, E
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-54
Chapter 01 - Financial Statements and Business Decisions
135. Birch Corporation's shareholders' equity equals one-fifth of the company's total assets.
The company's liabilities are $125,000. What is the amount of the company's shareholders'
equity?
$31,250 (X = 1/5X + $125,000)
Where X = total assets
Solving for X
X - 1/5X = $125,000 Shareholder's equity = (1/5)  $156,250 = $31,250
4/5X = $125,000
X = $125,000  5/4
X = $156,250 Proof: $31,250 + $125,000 = $156,250
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-55
Chapter 01 - Financial Statements and Business Decisions
136. Lopez Corporation began operations at the start of 20X3. During the year, it made cash
and credit sales totaling $974,000 and collected $860,000 in cash from its customers. It
purchased inventory costing $508,000, paid $25,000 for dividends and the cost of goods sold
was $445,000. The corporation incurred the following expenses:
Salary expense
Interest expense
Insurance expense
Supplies expense
Income tax expense
$180,000
15,000
10,000
18,000
65,000
Required:
1. Prepare an income statement showing revenues, expenses, pretax profit, income tax
expense, and profit for the year ended December 31, 20X3.
2. Based on the above information, what is the amount of trade receivables on the statement
of financial position prepared at the end of 20X3?
3. Based on the above information, what is the amount of retained earnings on the statement
of financial position prepared at the end of 20X3?
1. Lopez Corporation
Income Statement
For the Year Ended December 31, 20X3
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Chapter 01 - Financial Statements and Business Decisions
Revenues:
Sales
Total revenues
Expenses:
Cost of goods sold
Salary expense
Supplies expense
Interest expense
Insurance expense
Total expenses
Pretax profit
Income tax expense
Profit
$974,000
$974,000
445,000
180,000
18,000
15,000
10,000
668,000
306,000
65,000
$241,000
2. $974,000 - 860,000 = $114,000 trade receivables at the end of the year.
3. $0 beginning amount + $241,000 profit - $25,000 dividends = $216,000.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
Topic: 01-06 The Statement of Earnings
Topic: 01-09 The Statement of Changes in Equity
1-57
Chapter 01 - Financial Statements and Business Decisions
137. Delft Corporation was established on December 31, 20X1, by a group of investors who
invested a total of $100,000 for shares of the new corporation. During the month of January,
20X2, Delft provided services to customers for which the total revenue was $40,000. Of this
amount, $4,500 had not been collected by the end of January. Delft recorded salary expense
of $17,000, of which 90% had been paid by the end of the month; rent expense of $3,000,
which had been paid on January 1, 20X2; and other expenses of $8,500, which had been paid
by check. On January 31, 20X2, Delft purchased a van by paying cash of $25,000. There were
no other events that affected cash.
Required:
1. In which section of the statement of cash flows would the amount of cash paid for salaries
be reported?
2. In which section of the statement of cash flows would the amount of cash paid for the van
be reported?
3. By how much did Delft's cash increase or decrease during January?
4. If the amount of cash was $100,000 at the beginning of January, how much cash did Delft
have at the end of the month?
5. What was Delft's profit or loss (after income tax expense) for the month of January? The
income tax rate was 25%.
6. Explain why the net increase or decrease in cash for a business generally will be different
than the profit, or net loss, for the same period.
1. Cash used in operating activities
2. Cash used in investing activities
3.
Amount collected from customers
Payment of salaries
Payment of rent
Payment of other expenses
Payment for van
Decrease in cash
$35,500
(15,300)
(3,000)
(8,500)
(25,000)
$(16,300)
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Chapter 01 - Financial Statements and Business Decisions
4. Amount of cash at the end of January:
$100,000 - 16,300 = $83,700
5.
Revenues
Less expenses:
Salaries expense
Rent expense
Other expenses
Income before taxes
Income taxes
Profit
$40,000
$17,000
3,000
8,500
28,500
11,500
2,875
$8,625
6. Profit or loss for a period is equal to revenues minus expenses; it is not equal to the change
in cash. Revenues are reported on the income statement when the goods or services are sold to
the customer, which may be before or after the period in which cash is received from the
customer. Expenses are reported on the income statement in the period they are used to earn
revenues. Again, the payment of cash may occur before or after the period when an expense
appears on the income statement.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-59
Chapter 01 - Financial Statements and Business Decisions
138. Hot tub Supply, Inc., reported the following items for the year ended December 31,
20X9:
Wages and salary expense
Cost of goods sold
Rent expense
Sales revenue
Interest expense
Income tax expense
Trade receivables
Bank Loan
$825,000
1,400,000
490,000
3,417,000
50,000
161,000
45,000
500,000
Required:
Prepare an income statement for the year.
Hot tub Supply, Inc.
Income Statement
For the Year Ended December 31, 20X9
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Chapter 01 - Financial Statements and Business Decisions
Revenue:
Sales revenue
Total revenues
Expenses:
Cost of goods sold
Wages and salary expense
Rent expense
Interest expense
Total expenses
Pretax profit
Income tax expense
Profit
$3,417,000
$3,417,000
1,400,000
825,000
490,000
50,000
2,765,000
652,000
161,000
$491,000
Note: Trade receivables of $25,000 would appear on the statement of financial position, not
on the income statement. Bank Loan would also be on the statement of financial position.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-61
Chapter 01 - Financial Statements and Business Decisions
139. Empire Stores, Ltd., reported the following amounts on its statement of financial position
on December 31, 20X2:
Inventory
Notes payable
Cash
Share capital
Net property, plant and equipment
Trade receivables
Trade payables
Retained earnings
$710,000
160,000
300,000
900,000
425,000
88,000
131,000
?
Required:
1. What is the amount of Empire's total assets at the end of 20X2?
2. Identify the items listed above that are liabilities.
3. What is the amount of Empire's retained earnings at the end of 20X2?
4. Prepare a statement of financial position for Empire Stores as of December 31, 20X2.
5. Empire Stores wishes to purchase merchandise from your company on account. The
amount of the purchases would probably be about $5,000 per month, and the terms would
require Empire to make payment in full within 30 days. Would you recommend that your
company grant credit to Empire under these terms? Explain the reasoning for your response.
1. Total assets = $710,000 + 300,000 + 425,000 + 88,000 = $1,523,000
2. Liabilities: Trade payables and Notes payable.
3. Assets = Liabilities + Shareholder's equity
$1,523,000 = (131,000 + 160,000 + Shareholder's equity)
Shareholder's equity = $1,232,000 = Share capital + retained earnings
$900,000 + retained earnings = $1,232,000
Retained earnings = $332,000
4. Empire Stores, LTD
Statement of Financial Position
At December 31, 20X2
(in dollars)
1-62
Chapter 01 - Financial Statements and Business Decisions
Assets
Cash
Trade receivables
Inventory
Net property, plant and equipment
Total Assets
$300,000
88,000
710,000
425,000
$1,523,000
Liabilities
Trade payables
Notes payable (long-term)
Total liabilities
Shareholders' Equity
Share capital
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$131,000
160,000
$291,000
$900,000
332,000
$1,232,000
$1,523,000
5. The statement of financial position of Empire Stores shows that the company can pay its
short-term liabilities. There is cash of $300,000, more than enough to settle the accounts
payable of $131,000. I would recommend that my company grant credit to Empire Stores.
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Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
1-63
Chapter 01 - Financial Statements and Business Decisions
140. During 20X2, Whistler Company performed services for which customers promised to
pay $286,000. Of this amount, $270,000 had been collected by year end. Whistler paid
$125,000 in cash for employee wages and owed the employees $5,000 at the end of the year
for work that had been done but had not paid for. Whistler paid interest expense of $1,700 and
$80,000 for other service expenses. The income tax rate was 30%, and income taxes had not
yet been paid at the end of the year. Whistler declared and paid dividends of $20,000. There
were no other events that affected cash.
Required:
1. What was the amount of the increase or decrease in cash during the year?
2. Prepare an income statement for Whistler for the year.
3. Are you surprised the two numbers are different? Why or why not?
1. Amount of increase or decrease in cash:
$270,000
-125,000
-1,700
-80,000
-20,000
$43,300
Collected from customers
Paid to employees
Interest expense
Other service expense
Dividends
Increase in cash
1-64
Chapter 01 - Financial Statements and Business Decisions
2. Whistler Company
Income Statement
For the Year Ended December 31, 20X2
Revenues
Service revenues
Total Revenues
Expenses
Wages expense
Service expense
Interest expense
Total expense
Pretax profit
Income tax expense
Net income
$286,000
286,000
130,000
80,000
1,700
211,700
74,300
22,290
$52,010
3. Not surprising because tracking a change in cash is not the same as measuring accrual
accounting income. The discipline of accounting is based on accruals.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-65
Chapter 01 - Financial Statements and Business Decisions
141. Poirier Company manufactures infant 's clothing. During 20X9, the company reported
the following items that affected cash. Indicate whether each of these items is a cash flow
from operating activities (O), investing activities (I), or financing activities (F).
Description
Purchased equipment by paying cash
Collected cash on account from customers
Paid dividends to shareholders
Paid cash for supplies
Paid suppliers for fabric
Purchased insurance for factory
Borrowed money from bank on a long-term note
Paid interest to bank on the note
Paid wages to employees
Sold shares to new shareholders
Classification
Answer: Purchased equipment by paying cash: I
Collected cash on account from customers: O
Paid dividends to shareholders: F
Paid cash for supplies: O
Paid suppliers for fabric: O
Purchased insurance for factory: O
Borrowed money from bank on a long-term note: F
Paid interest to bank on the note: O
Paid wages to employees: O
Sold shares to new shareholders: F
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-12 The Statement of Cash Flows
1-66
Chapter 01 - Financial Statements and Business Decisions
142. Fulton Company was established on January 1, 20X4 when several investors paid a total
of $200,000 to purchase Fulton shares. No additional investments in shares were made during
the year. By the end of that year, Fulton had cash on hand of $45,000, office equipment (net)
of $40,000, inventories of $156,000, and trade payables of $10,000. Sales for the year were
$812,000. Of this amount, customers still owed $20,000. Fulton paid dividends of $25,000 to
its investors.
Required:
1. Based on the information above, prepare a statement of financial position for Fulton
Company as at December 31, 20X4. In the process of preparing the statement, you must
calculate the ending balance in retained earnings.
2. What was the amount of Fulton's profit for the year?
3. Was Fulton successful during its first year in operation?
1. Fulton Company
Statement of Financial Position
At December 31, 20X4
Assets
Cash
Trade receivables
Inventories
Office Equipment (net)
Total Assets
Liabilities
Trade payables
Shareholders' Equity
Share capital
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$45,000
20,000
156,000
40,000
$261,000
$10,000
$200,000
51,000
251,000
$261,000
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Chapter 01 - Financial Statements and Business Decisions
2.
Retained earnings, January 1, 20X4
Profit (plug)
Dividends to shareholders
Retained earnings, December 31, 20X4
$-076,000
(25,000)
$51,000
3. Yes, Fulton's first year was successful. The company earned a healthy amount of profit, and
many new companies have losses during their early years of operations. Also, it was able to
pay dividends to its shareholders. At the end of the first year, the company has just $10,000 in
liabilities. It appears to be in sound financial condition.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
Topic: 01-06 The Statement of Earnings
1-68
Chapter 01 - Financial Statements and Business Decisions
143. For Kiddy Fashions, the following information is available for the year ended December
31, 20X9:
Sales revenue
Cost of goods sold
Salaries expense
Income tax payable
Rent expense
Administrative expense
$5,500,000
2,800,000
1,100,000
5,000
620,000
490,000
The income tax rate is 35%.
Required:
Prepare an income statement for Kiddy Fashions.
Kiddy Fashions
Income Statement
For the Year Ended December 31, 20X9
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Chapter 01 - Financial Statements and Business Decisions
Revenue:
Sales revenue
Total revenue
Expenses (excluding income taxes):
Cost of goods sold
Salaries expense
Rent expense
Administrative expense
Total expenses
Pretax profit
Less income tax expense
Profit
$5,500,000
$5,500,000
2,800,000
1,100,000
620,000
490,000
5,010,000
490,000
171,500
$318,500
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-70
Chapter 01 - Financial Statements and Business Decisions
144. The following data was taken from the books of Assiniboine Inc. as of December 31,
20X9:
Cost of goods sold
Income tax expense
Cash
Dividends
Interest expense
Amortization expense
$15,300 Selling & admin expense
6,120 Accounts payable
3,500 Common shares, (6,500
shares)
6,000 Other income
900 Sales revenue
1,500 Retained earnings
Prepare an income statement for Assiniboine Inc.
Assiniboine Inc.
Income Statement
For the Year Ended December 31, 20X9
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$3,500
12,000
20,000
1,500
50,000
8,000
Chapter 01 - Financial Statements and Business Decisions
Sales
Other income
Total revenues
Costs and expenses:
Cost of goods sold
Selling & administrative expense
Interest expense
Amortization expense
Total costs and expenses
Earnings before taxes
Income taxes
Net income
$50,000
1,500
51,500
15,300
3,500
900
1,500
21,200
30,300
6,120
$24,180
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-06 The Statement of Earnings
1-72
Chapter 01 - Financial Statements and Business Decisions
145. Baseline Corporation was formed two years ago, to manufacture fitness equipment. It
has been profitable and is growing rapidly. It currently has 150 shareholders and 90
employees; most of the employees own at least a few shares of Baseline's shares. The
company has received financing from two banks. It will sell additional shares within the next
three months and will also seek additional loans and hire new employees to support its
continued growth.
Required:
1. Explain who relies on the information in financial statements prepared by Baseline
Corporation.
2. Why is compliance with international financial reporting standards and accuracy in
accounting important for Baseline?
3. A new accountant who tried to prepare Baseline's financial statements at the end of the
current year made several errors. For each of the following items, indicate how the income
statement and statement of financial position are affected by the error and the nature of the
effect. (For example, an error might cause revenues and net income on the income statement
and retained earnings and assets on the statement of financial position to be overstated).
Ignore the effects of income taxes.
A. The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000
that had been collected by the end of the year, and sales on account of $200,000 that are
expected to be collected early the following year. The accountant reported total sales revenue
of $4,800,000.
B. The company had total inventories of $600,000 at the end of the year. Of this amount,
inventory reported at $30,000 was obsolete and will have to be scrapped. The statement of
financial position prepared by the accountant showed total inventories of $600,000.
C. The company has a bank loan for which interest expense during the year of $10,000 will be
paid early in January of the next year. The accountant did not record either the interest
expense or the related liability.
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Chapter 01 - Financial Statements and Business Decisions
1. Various external decision makers rely on the financial statements of a corporation. For
Baseline, these decision makers include the bankers who have loaned money to the company.
These creditors would monitor the performance of Baseline to estimate the likelihood that
Baseline will be able to repay existing loans when they come due, and to decide whether to
make additional loans to Baseline in the future. Current shareholders would want to review
Baseline's financial statements to decide whether they wanted to continue to own Baseline's
shares. Potential shareholders and creditors would use the information to decide whether they
wanted to purchase Baseline's shares or loan money to the company in the future. Baseline
anticipates hiring additional workers in the near future; potential employees might use
information in the financial statements to evaluate the company as an employer.
2. Compliance with international financial reporting standards and accuracy in accounting are
important to Baseline because they are important to the people who use Baseline's financial
statements. To maintain the credibility of its financial statements, Baseline must comply with
IFRS and must ensure the accuracy of its accounting records.
3. A. On the income statement, revenues are understated by $200,000 and profit is
understated. On the statement of financial position, trade receivables and retained earnings are
understated.
B. On the statement of financial position, inventory and retained earnings are overstated by
$30,000. On the income statement, expenses are understated and profit is overstated.
C. On the income statement, expenses are understated and profit is overstated by $10,000. On
the statement of financial position, interest payable is understated and retained earnings are
overstated.
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: Hard
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-02 The Statement of Financial Position
Topic: 01-06 The Statement of Earnings
Topic: 01-18 Responsibilities for the Accounting Communication Process
Topic: 01-19 International Financial Reporting Standards (IFRS)
1-74
Chapter 01 - Financial Statements and Business Decisions
146. Lloyd Company ends the first year of operations with $2.2 million in retained earnings
when no dividends were paid out. Since the company began operations on January 1st, 20X2
of the current year ending December 31st, 20X2 calculate the amount of beginning retained
earnings and explain your answer.
The beginning balance of retained earnings is zero because a new business would not have
generated income from prior operations. Retained earnings represents the profit generated
through operations not distributed in the form of a dividend. A company just beginning
operations could not have any profit so there would always be a zero beginning balance for
new companies.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the
information is used by different decision makers (investors, creditors, and managers).
Topic: 01-09 The Statement of Changes in Equity
1-75